While capital for larger multifamily properties was quicker to come back, smaller loans have lagged behind. That phenomenon appears to turning around for loans less than $3 million.
Local and regional banks are by far the predominant lender in the small loan multifamily sector. While the number of local banks in the market to make these loans has shrunk, those who are lending are proactively seeking deals. A distance second is Fannie Mae (15 percent market share in 2009) who, conversely to Freddie Mac, has a small loan program. Fannie will lend mostly in primary markets and at times in secondary markets. Credit unions are third and typically only lend to a very select group with whom they have strong relationships. The bulk of loans for all three capital sources are for the most part recourse in today’s market, but strong assets with lower leverage and found in very sound markets can be non – recourse.
Both the regional banks and Fannie Mae will charge comparable interest rates. LTV on the small Fannie program can go up to 80%, but the stringent 1.25-1.30 debt service coverage ratio (DSCR) constrains the amount of loan dollars available. Local banks will also go to 80% LTV, and can get DSC requirements to 1.15 for newer assets with borrowers that have good track records. Many banks will only lend to clients with whom they have existing relationships.
Lenders tend to see smaller multifamily properties as having more risk compared to their larger counterparts. One reason is the sheer number of units being lower and the subsequent risk with vacancy rates being driven up by a few open units. The individual borrower(s) are also scrutinized on their own financial stability along with history of operating similar apartment assets. Lenders are looking for buildings with little to no deferred maintenance, stabilized occupancy, good historical performance and local, proactive ownership.
Small multifamily loans should continue to grow heading into the end of 2011. With other asset classes still lagging behind multifamily performance, along with development loans still being scarce, banks see multifamily as a safe place to deploy funds.
Source: Justin Verner ; Advisor with Sperry Van Ness|RealSite Commercial Group
Specializing in Multifamily Investment Sales